You raise some good questions, and you might like to throw it over to the Biotech board - it's late here so I'll try and make my points brief.

The main one is that for all the noise the big pharmas make about patent expiries, they do carry on selling ex-patent drugs - Glaxo still sells some $500m-worth of Zantac a year for instance, despite the patent on that going 5-10 years ago. You mention Prilosec, known as Losec here - that's a good example where a drugs company will stop pushing an old drug, as they will make more money by pushing a 'better' replacement, in this case Nexium. But there's an interesting area of health economics where you get a new drug that's marginally more effective but a lot more expensive - collective health schemes in particular may take the view that they're only prepared to pay for the old one. Bayer aspirin is another interesting one - it's debatable whether you can really say that it's the same company selling Bayer asprin as patented it all those years ago - those US assets of IG Farben ended up with Sterling, although the aspirin bits were bought back by a successor company calling themselves Bayer. It's a great example of marketing though - here in the UK, Bayer does not sell branded aspirin, it's universally bought as a generic. This highlights the fact that in the US, direct to consumer advertising means that branding and marketing can become more important that mere price and efficacy. It's important to remember that big pharma is more about marketing than research.

I'd also guess that they have pretty strict targets for returns on capital employed and that kind of thing, which means that generic manufacturing is much less attractive for them, but can represent a big market for a much smaller company to target.

Finally, as has been discussed on the Biotech board, the issue of generic biologicals is a whole different ballgame, as a biological (antibody etc) needs to undergo fresh trials if it's made by a different company. Conversely, some drug targets are attractive enough for several antibodies to be aimed at them simultaneously - anti-TNF strategies are one such. Even in generic biologicals though, you see some companies targetting the market outside the US - the London-quoted GeneMedix (GMX.L) is one such.

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